Financial Analysis of Merck

If you order your custom term paper from our custom writing service you will receive a perfectly written assignment on Financial Analysis of Merck. What we need from you is to provide us with your detailed paper instructions for our experienced writers to follow all of your specific writing requirements. Specify your order details, state the exact number of pages required and our custom writing professionals will deliver the best quality Financial Analysis of Merck paper right on time. Our staff of freelance writers includes over 120 experts proficient in Financial Analysis of Merck, therefore you can rest assured that your assignment will be handled by only top rated specialists. Order your Financial Analysis of Merck paper at affordable prices with cheap essay writing service! Introduction.

The nature of financial analysis for a given company or industry has changed dramatically in the last few years. Due to both the exponentially increasing dynamic nature of business, as well as the greatly enhanced ability to gather a wealth of information, making decisions on the viability and stability of a company or industry has grown increasingly complex. One method in determining the overall health of a business is the use of financial ratio analysis. Comparing various facets of a company's financial performance through its ratios, especially when also comparing these same ratios for peer companies as well as the industry as a whole, can be a useful starting point for any investor. In this paper, we attempt to provide cursory information regarding the financial performance for Merck & Co., a major pharmaceutical provider, through a few ratios computed from the company's recent financial reports. We also compare Merck with two similar companies in the major drug industry, as well as the industry itself. Using these ratios, it would seem that Merck is slightly under performing in the pharmaceutical industry.

Background.

The history of Merck & Co., Inc. can be tracked back to 1668 in Darmstadt, Germany, when Frederic Jacob Merck opened a chemical company. In 181, distant relative George Merck decided to relocate to the United States and set up Merck & Co., Inc. in New York. His original U.S. enterprise focused on chemicals sales; in the early 10s, Merck & Co., Inc. began its pharmaceutical studies (History of Merck, 00). The merger with Sharp & Dome to form Merck Sharp & Dohme (MSD) in 15 established a solid foundation for a fully incorporated, multinational manufacturer and distributor of pharmaceutical products. For the duration of the past six decades, Merck & Co., Inc. has assembled a global research company that ranks among the best worldwide in terms of the talent of its scientists and advancements in medical research. Today, Merck & Co., Inc. has about 70,000 employees in 10 countries and 1 factories worldwide. Merck's products are sold currently in more than 00 countries (History of Merck, 00).

Buy cheap Financial Analysis of Merck term paper

Merck has been on the forefront in drug production and research. Currently the company has six drugs that bring in 60 percent of its pharmaceutical revenue. These are as follows Vioxx, a medication for osteoarthritis and acute pain; Zocor, a cholesterol-modifying medication; Cozaar and Hyzaar, high blood pressure medications; Fosamax, a treatment for postmenopausal osteoporosis; and Singulair, an asthma control medication. For the past five years, Merck has been on a steady rise with sales (see Figure 1) as well as research and development allocation of funds. Within this time, Merck has developed many new drugs that have advanced their net income and earning potential. Despite many forces working against Merck, the drug maker's performance has remained amazingly firm. The patents on some of its most profitable products have terminated, transferring sales of those drugs into free fall because of generic competition. At the same time, some of Mercks blockbusters, including the $5.6 billion cholesterol drug Zocor and the $. billion osteoporosis treatment Fosamax, have continued to grow helping Merck attain high sales for 00.

Year Amount ($millions)

00 $51,70

001 47,716

000 40,6

1 ,714

18 6,88

Figure 1 Merck & Co., Total Revenue, 18-00 (Investor Information, 00)

One particular business item has brought Merck a plethora of recent media attention. In 1, Merck & Co., Inc. acquired Medco Containment Services, Inc., the leading pharmacy benefits management company in the United States, and renamed the limited liability company Merck-Medco Health Care (Multex Investor, 00). As a subsidiary of Merck, Medco Health grew to become the nation's leading pharmacy benefits management (PBM) company, providing integrated prescription health care to 6 million Americans. "Together, Merck and Medco Health have enjoyed 10 years of growth and success. Medco Health increased revenues from $. billion in 1 to $ billion in 00, and last year, filled or processed approximately 548 million prescriptions" (Merck, 00). Recently however, Merck successfully completed the spin-off of 100% of the outstanding shares of the renamed Medco Health Solutions, Inc. common stock to Merck stockholders. For the sake of simplicity, however, all financial information regarding Merck in this paper includes Medco data as well.

Financial Ratio Analysis of Merck & Co.

Financial ratios are an integral part of assessing a company's overall business health. According to Block and Hirt (00), "Financial ratios are used to weigh and evaluate the operating performance of the firm." They list several important ratio calculations in four categories profitability, asset utilization, liquidity and debt utilization. Several of these primary ratios in each category can be used as a partial assessment of Merck's operational stability over the past years. All data used to calculate these ratios was collected from the annual 10-K form provided by Merck (00) to the Securities and Exchange Commission (SEC).

Profitability Ratios.

Simply stated, profitability ratios are a measurement of a firm's efficiency in making money from sales, assets and invested capital. A company that cannot adequately use its financial resources to make a profit for its owners (stockholders) cannot remain competitive in the market. Three profitability ratios mentioned in Block and Hirt are profit margin, return on assets (investment), and return on equity. All three ratios express the net income of a firm as a percentage of some asset measurement.

A firm's profit margin equates net income to sales. The equation for profit margin is defined as follows Profit Margin = Net Income / Sales (or Revenue). This ratio indicates what percentage of total revenue is actually retained after subtracting out operating costs and income taxes. The closer the profit margin is to 100%, the more efficient a firm is at using its capital to generate revenue. In Figure , the profit margin for the 00 was 1.8%, down from almost 17% in 000.

Return on assets (investment) (ROA) is used to gain information on how well a firm makes money off its investments. The equation for ROA is stated as follows

ROA = Net income / Total assets. Similar to the profit margin ratio, a higher percentage indicates an increased ability to use assets to generate further profits. For Merck, their ROA for 00 was 15%, down two percentage points from 000 (Fig. ).

The last profitability ratio introduced is Return on equity (ROE). Stated mathematically as ROE = Net income / Stockholder equity, this ratio measures the effectiveness of the firm to make money compared to that of the owners' (i.e. the stockholders) own return. As with the previous two measures, the higher the ROE, the more efficiently the company can take stockholder earnings and generate even more profit for them. Unfortunately for Merck, their ROE has dropped 15% in the last two years, to .% in 00 from 46% in 000 (Fig. ).

00 001 000

net income $7,150 $7,8 $6,8

total revenue $51,70 $47,716 $40,6

total assets $47,561 $44,007 $,10

stockholder equity $18,01 $16,050 $14,8

profit margin 1.8% 15.% 16.%

ROA 15.0% 16.5% 17.1%

ROE .% 45.4% 46.0%

Figure . Input data and profitability ratios for Merck & Co., 000-00 (all dollar figures in millions).

Asset Utilization.

A related category to profitability ratios is asset utilization ratios; they are both used to measure the efficiency of a firm to utilize resources towards making money. Where profitability ratios measure efficiency as a return on resources, asset utilization ratios measure the swiftness in which a firm can utilize assets. Three asset utilization measures are receivable turnover, inventory turnover, and total asset turnover.

Receivables turnover is simply a measure of how quickly a company can covert money owed from sales into actual cash. Although accounts receivable are considered short-term assets, it is still a promise from customers to pay, and not actually money in the bank. The equation for receivables turnover is as follows

Receivables turnover = Sales (credit) / Accounts receivable. (Although it is conceivable that pharmacies and other drug dispensaries might pay cash up front for pharmaceuticals, it is highly unlikely that this would occur, and as such, the assumption made is that total revenue is entirely on credit.) The higher the number generated, the faster a company is at collecting money owed. For Merck in 00, the receivables turn rate was .5 times, up from 8.0 two years earlier (see Figure ); this indicates that Merck is improving on its ability to collect receivables owed.

The next asset ratio, inventory turnover, measures how swiftly a firm can dispense of its inventory. A firm that can effectively turn its inventory at a rapid pace (relative to the industry) will earn revenues faster than others will. As with receivables turnover, the higher the number, the faster the firm is exhausting inventory. The equation for inventory turnover is as follows Inventory turnover = Sales / Inventory. For Merck, the inventory ratio for 00 was 15. times, a 1% increase from 000 (Figure ).

Finally, total asset turnover is an indicator of how swiftly a company can use its assets to generate profits; it is the closest in relation to profitability ratios (total revenue versus net income). As with the previous two ratios, the higher the asset turnover, the better a company is at producing money with its assets. The equation for total asset turnover is as follows Total asset turnover = Sales / Total assets. For Merck, the 00 total asset turnover rate was 1.1 times, and fairly stable across the time measured (Figure ).

00 001 000

Total revenue $51,70 $ 47,716 $40,6

Accounts receivable $ 5,4 $ 5,15 $ 5,018

Inventory $ ,41 $ ,57 $ ,0

Total assets $47,561 $ 44,007 $,10

Receivables turnover .5 .1 8.0

Inventory turnover 15. 1. 1.4

Total asset turnover 1.1 1.1 1.0

Figure . Input data and asset utilization ratios for Merck & Co., 000-00 (all dollar figures in millions).

Liquidity Ratios.

Although a firm may generate revenues and collect accounts due from its customers, it must also be able to meet its own financial obligations. The ability of a firm to satisfy its own short-term obligations is the focus of liquidity ratios. These ratios reflect the amount of financial capital a company can (in theory) produce "on the spot" to satisfy its own creditors. The two most popular liquidity ratios are current ratio and quick ratio, and these are popular ratios with financial analysts.

The current ratio is a measure of a firm's current (i.e. short-term) assets as compared to its current liabilities. The equation for a firm's current ratio is as follows

Current ratio = Current assets / Current liabilities. The higher the current ratio, the better placed a company is to meet its financial obligations. Although not definitive mathematically, many bankers, creditors and analysts believe that a current ratio of at least (i.e. two times assets to liabilities) is necessary for a firm to be considered a good credit risk. The current ratio for Merck for 00 was 1., down slightly from 000 (see Figure 4). Merck thus has liabilities roughly equal to its assets.

To determine better the ability of a company to come up with money quickly, some analysts prefer to use the quick ratio. This ratio disregards inventory (which for some industry may take months to move) as well as prepaid expenses (which cannot be recovered in many cases). The only current assets considered for the quick ratio are cash, marketable securities, and accounts receivables. The equation for the quick ratio is as follows Quick ratio =Quick assets / Current liabilities. For Merck, the 00 quick ratio was 0., down from 1.1 in 000 (Figure 4). (Inventory was the only non-quick current asset listed in its balance sheet.)

00 001 000

Current assets $14,84 $1,6 $1,5

Inventory $,41 $,57 $,0

Current liabilities $1,75 $11,544 $,710

Current ratio 1. 1.1 1.4

Quick ratio 0. 0.8 1.1

(where Quick ratio=(current assets-inventory)/current liabilities)

Figure 4. Input data and liquidity ratios for Merck & Co., 000-00 (all dollar figures in millions).

Debt Ratios.

Similar to profitability and asset utilization ratios, debt ratios are related to liquidity ratios. Analysts might speculate that a highly indebted company will most likely have greater difficulty meeting its own financial obligations (although this may not always be the case). An investor will be hesitant to issue further debt to a company that already carries a large debt load. Miegs et al. (001) state that a large debt load can actually be favorable for a firm, if that firm is using its debt as leverage, i.e. reinvesting debt at a higher rate of return that the interest rate on the credit. For these reasons, debt ratios are popular especially with bankers and other long-term investors as well as financial analysts. The main debt ratio is known often as the debt ratio, or as debt to total assets. The equation for the debt ratio is as follows

Debt ratio = Total liabilities / Total assets. The higher the debt ratio, the more debt a firm carries; as stated previously, this may not necessarily be a bad thing. The debt ratio for Merck in 00 was 61.7%, down slightly from 000 (see Figure 5).

00 001 000

Total liabilities $,61 $7,57 $5,078

Total assets $ 47,561 $44,007 $,10

Debt to total assets 61.7% 6.5% 6.8%

Figure 5. Input data and debt ratio for Merck & Co., 000-00 (all dollar figures in millions).

Comparison with two other major drug companies of comparable size.

In order to determine how Merck & Co. compared with the pharmaceutical industry we chose to compare some financial ratios of Merck & Co. to those of Pfizer and Johnson and Johnson (J & J). All three companies are on the Dow Jones Industrial Average top 0 list, and have comparable operating revenues (see Figure 6). For the profitability ratios we chose to compare based on the profit margin, return on equity and return on assets. For liquidity ratios we chose to compare based on the current ratio. Finally, for the debt utilization ratios we chose to compare the debt to total assets ratios. Herman Saftlas, for Standard & Poor's Corporation (00) compiled all data used for these comparisons. We do not intend to present these ratios as an "invest/do not invest", but only to compare aspects of Merck & Co.'s financial performance to the performance of a few of its peers.

Company (Ticker Symbol) 00 001 000 1 18

Merck (MRK) 51,70 47,715 40,6 ,714 6,88

Pfizer (PFE) ,7 ,084 ,574 16,04 1,544

Johnson & Johnson (JNJ) 6,8 ,004 ,1 7,471 ,657

Figure 6 Operating Revenues for Merck & Co., Pfizer and Johnson & Johnson, 18-00 (all figures in millions of $).

Reviewing the profitability ratios for the three companies, it becomes clear how easily the individual numbers can disorient a potential investor. For ROA, ROE and profit margins, all three companies are performing above the industry averages, although to varying degrees (see Figure 7). Comparing Merck to Pfizer and J & J, one trend becomes apparent for all three ratios, Merck has shown a decline in the past three years, while Pfizer and J & J have shown increases for the same period. The industry as a whole has retained a stable ROA and ROE for the last three years, while showing an increasing profit margin. Thus, it seems that in comparison to two similar companies, as well as to the industry, Merck has not performed adequately in using its assets to make money.

ROA (%) ROE (%) Profit Margin (%)

Ticker Symbol 00 001 000 00 001 000 00 001 000

MRK 15.6 17.4 18.1 41.7 47. 48.6 1.8 15. 16.

PFE 1.5 1. 1.7 48 45.1 .8 8.4 4. 1.6

JNJ 16.7 16. 15. 8.1 6. 7.4 18. 17. 16.5

Industry Avg 1.1 1. 1.1 8. 8.5 8.5 18.6 16. 15.

Figure 7. ROA, ROE and profit margin for Merck, J & J, and Pfizer, 000-00.

Merck's current ratio for 00, 1., has been up and down since 16, but, overall, it has been on a decline (see Figure 8). This was below the industry average of .. Pfizer has a current ratio of 1. and has not had much variation for the past several years, whereas J & J has had an unsteady rise and fall in their current ratio, which is currently at 1.7. The current ratio for the industry has fallen in the last few years; however, the ratio itself does not indicate whether the decline is due to increasing short-term liabilities or decreasing short-term assets for the industry as a whole. Merck has nonetheless retained stability, as has its two peer companies, in its overall short-term assets and liabilities, and should have less issues compared with other companies in covering its financial obligations.

Ticker Symbol 00 001 000

MRK 1. 1.1 1.4

PFE 1. 1.4 1.4

JNJ 1.7 . .

Industry Average . .5 4.5

Figure 8. Current Ratios for Merck, Pfizer and J & J, 000-00.

In terms of long-term debt and assets, all three peer companies seem to exhibit different profiles. For Merck, the debt ratio has remained fairly constant, with a slight upward trend; for J & J, an opposite slow downward trend is true. Pfizer on the other hand has either increased its long-term liabilities, or decreased its total assets, twofold; this is more like the industry as a whole. Perhaps the variability in the debt ratio for the three companies as well as the industry signals confusion within the industry as to whether taking on the risk of extra debt will ultimately pay off for the companies as well as the industry in this weakened economy. For Merck, it seems that the company would rather remain conservative compared to the industry in terms of increasing debt; other companies in the industry may feel similarly, however it would seem most are willing to add additional debt to their capital structure.

Ticker Symbol 00 001 000

MRK 16. 17.6 14.6

PFE 1.4 1. 6.4

JNJ 8 8. .7

Industry Average 8.6 . 18.4

Figure . Debt-to-total asset ratios for Merck, Pfizer and J & J, 000-00 (in %).

Conclusion.

Any person with even cursory finance experience can appreciate the fact that a few simple financial ratios do not define the stability of a company nor its overall attractiveness to potential investors in a comprehensive fashion. In order to evaluate fully the ability of a company to maximize its shareholder wealth, the wise investor will also delve deeply within the company's financial reports, as well as external analyst evaluations and historical company performance, to name just a few sources of information. However, financial ratios for a given company, especially when compared with peer companies within the industry as well as the industry itself, can provide a quick snapshot of the company, and any glaring issues that might hinder the effectiveness of a company to attract revenue. Although Merck is a stable company within the major pharmaceutical industry, a quick scan of a few financial ratios provide evidence that it is perhaps lagging behind its peers in terms of profitability, and is hesitant to take on additional financial risk compared to the industry. Further research into these areas would be wise for any future investor.

Block, S. and Hirt, G. (00). Foundations of Financial Management. The McGraw-Hill

Companies NY (NY), p.55.

History of Merck. (n.d.). Retrieved September 10, 00, from http//www.msd.com.hk/about_us/e_history_of_merck.html

Investor Information. (00). Retrieved September 10, 00, from http//www.corporate-ir.net/ireye

Merck (00, March 1). Merck & Co. Inc. Form 10-K. Retrieved August , 00 from

http//www.edgar-online.com

Merck. (00, August 0). Merck & Co., Inc. Completes Spin-Off of Medco Health

Solutions Inc. Retrieved September 10, 00, from

http//www.merck.com//finance/medco_spinoff.html

Multex Investor Financial Research and Information (00). MRK Full Description.

Downloaded September 14, 00 from

http//yahoo.multexinvestor.com

Saftlas, H. (00, June 6). Healthcare Pharmaceuticals. Standard & Poor's

NetAdvantage Industry Surveys. Downloaded September , 00 from

http//www.netadvantage.sandp.com

Stock Selector. (00). Current Analyst Summary. Retrieved September 10, 00, from http//www.stockselector.com

Please note that this sample paper on Financial Analysis of Merck is for your review only. In order to eliminate any of the plagiarism issues, it is highly recommended that you do not use it for you own writing purposes. In case you experience difficulties with writing a well structured and accurately composed paper on Financial Analysis of Merck, we are here to assist you. Your cheap custom college paper on Financial Analysis of Merck will be written from scratch, so you do not have to worry about its originality.

Order your authentic assignment from cheap essay writing service and you will be amazed at how easy it is to complete a quality custom paper within the shortest time possible!